MA – Sales Tax on Automobile Sale Recision

In an effort to make deciding on an automobile easy, several manufacturers have set up what they call “a test drive”.  They give the buyer a certain time to return the vehicle for a full refund less a mileage charge and other fee.

In order to determine if it is worthwile taking the “test drive” it is important to know if the sales tax is refundable.  If not, in Massachusetts the “test drive” not only costs the mileage charge and fee, it will also cost 5% of the original purchase price.  That would make the “test drive” an expensive test.

Massachusetts has issued a policy on what effect the recision of an automobile purchase on the sales tax. In MA Directive 06-4 “The purchaser is entitled to an abatement of the sales tax if the vehicle is returned within 180 days of the date of the sale and the entire purchase price is refunded by the dealer, less the dealer’s established handling fee, if any. The handling fee must be reasonable, may be a flat fee or a percentage of the sales price, and may be established by the dealer’s customary policy or by written contract.”

“A mileage charge is not a vendor’s established handling fee. However, the imposition of a reasonable mileage charge will not preclude the return of a vehicle as being treated as a rescission for sales tax purposes, providing the other statutory criteria are met. The mileage charge will be treated as a charge for the rental or lease of the motor vehicle and as a new transaction subject to sales tax. The tax imposed on the mileage charge will be deducted from the amount of tax abated to the purchaser by the Department relating to the rescission.”

If you are not a resident of Massachusetts, you should check with your states sales tax department to determine how your state handles the sales tax on the recision of the automobile sales contract.

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